One year of GST: Prime Minister Narendra Modi said that Mercedes and milk cannot be taxed at the same rate, and noted economist and India’s first chief statistician Pronab Sen agrees, “in-principle”. The Goods and Services Tax, which was launched a year ago after a 17-year-long deliberation, has five tax slabs, which has led to a lot of clamour from the opposition and a consistent demand for a single tax rate.
“A single GST rate is inherently regressive,” Pronab Sen told FE Online.
“One of the touchstones of a good tax is that it should be progressive, i.e. the rich should pay more tax as a percentage of their expenditures than the poor. A single GST rate is inherently regressive,” Pronab Sen said. Moreover, in theory, there is no loss in efficiency if different final consumption goods have different tax rates, he added.
India’s multiple tax rate structure is highest and most complex in the world among 115 nations with similar indirect tax regime, the World Bank had said in a report earlier this year. However, even the World Bank called for minimising the slabs and not bringing it down to one. It said in its bi-monthly India Development Update report that the key to the GST’s success is a policy design that minimizes the number of different rates and limits exemptions.
India also follows the progressive tax structure for direct tax — with the rich paying more, the middle class paying comparatively less and the poor being exempt.
While multiple tax rates for final consumption goods are absolutely progressive and have no impact on the efficiency, Pronob Sen said that “any good or service that is in the nature of an input into further production processes should have the same rate”.
The Narendra Modi government has ruled out single GST rate system time and again but has been open to reducing the number of slabs given the tax buoyancy in future. Outgoing Chief Economic Advisor Arvind Subramanian recently said that there is a need for rate rationalisation and the government should start with abolishing 28% tax bracket.
“I think the 28 per cent rate has to go. The cesses may have to remain, but there should be just one rate on cesses… Today, we have GST rates of zero, 3% (for gold), 5%, 12%, 18% and 28%. We need to rationalise but I think at the first instance the 28% should go,” Arvind Subramanian said.
In November 2017, the GST Council did a massive rate rationalisation, in which over 200 products were brought down to lower tax rates from 28%, 18% and 12% brackets. The consumers, which bear the final tax burden, also think that in a country like India, a three GST slab system would work well. As many as 40% of 32,000 people surveyed in 220 districts by LocalCircles favoured a three-rate structure and only 19% voted for a single tax rate.
This interview was originally published on 2 July 2018 on www.financialexpress.com